Tax Reform Silliness

Barack Obama did a bunch of big things in his first term—passed health care reform and ended the war in Iraq, most notably. If he wants to do something big domestically in his second term (especially since he seems to have lost any inclination to do anything about climate change), one natural area to try would be tax reform. It might actually be possible to arrive at something both Democrats and Republicans could live with, if we put aside Republicans' desire to make sure he never accomplishes anything, ever (which will continue into his second term). Republicans already have their own tax plan, which lays out some goodies they'll give people (especially wealthy people, you'll be shocked to learn) while conveniently avoiding any specificity on how the goodies will be paid for.

Some analyses have been done on the Republicans' plan, and they don't look too good:

The tax reform plan that House Republicans have advanced would sharply cut taxes for the wealthiest Americans and could leave middle-class households facing much larger tax bills, according to a new analysis set to be released Wednesday.

The report, prepared by Senate Democrats and reviewed by nonpartisan tax experts, marks the first attempt to quantify the trade-offs inherent in the GOP tax package, which would replace the current tax structure with two brackets — 25 percent and 10 percent — and cut the top rate from 35 percent.

Those changes would benefit virtually every taxpayer, but they also would reduce federal tax collections by about $4.5 trillion over the next decade, according to the nonpartisan Tax Policy Center. To avoid increasing the national debt by that amount, GOP leaders such as House Budget Committee Chairman Paul Ryan (Wis.) have pledged to get rid of all the special-interest loopholes and tax shelters that litter the code.

Republicans have declined to identify their targets. However, some of the biggest "loopholes" on the books are popular tax breaks for employer-provided health insurance, mortgage interest, state and local taxes, and retirement savings, which disproportionately benefit the upper middle class.

So although households earning $100,000 to $200,000 a year would save about $7,000 from the lower tax rates in the GOP plan, those savings would be swamped by eliminating major deductions, according to the report by the Democratically controlled congressional Joint Economic Committee.

There's something wrong with this analysis, however: Republicans are never going to actually propose eliminating those big loopholes. Never, never, never. If you think they'll come out and say they want to get rid of the mortgage interest deduction, the biggest middle-class entitlement the government hands out, you're nuts. So what you're actually left with is a plan with big tax cuts at the top end that balloon the deficit. Hooray!

There is one thing that we should keep in mind if this debate ever gets going in earnest: We need more income tax brackets, not fewer, and we especially need them at the top. Right now, you pay the same rate if you make $400,000 a year as you do if you make $400 million a year, which is absurd. "Simplicity" is not a value in and of itself if it produces unfairness. But you can bet that Republicans will be talking a lot about simplicity as the justification for their desire to cut rates for those job creators.

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